Good taxation news
14 / 9 / 2009
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Historically the taxation of non residents has always been different to that of Spanish residents and this has been widely criticised by professionals and taxpayers particularly by those resident in other EU member states. Discrimination of EU citizens or companies is prohibited under EU Law since its inception and the signing of the European Union treaty and all subsequent EU Legislation and all European countries have had to adapt their internal legislation to be in compliance with this very basic but fundamental principle. Spain is not an exception, and the European Commission is constantly on the watch for instances of lack of compliance.

Only three years ago, capital gains tax for non residents was still 35% whilst at the same time residents of Spain were only paying 15%, that was drastically reduced to the present rate of 18% in January 2007 in order to bring it into line with the taxation of Spanish residents, and only last year wealth tax was abolished for all residents and non residents of Spain.

The Spanish Tax Authorities have finally agreed to further changes in the taxation of non residents after months of discussions with the EU Commission which was requesting that companies and individuals resident in other EU member states receive equal treatment to residents of Spain under Spanish income tax law.

The draft legislation prepared by the Directorate General of Taxation for the Spanish Government, which should be passed imminently, improves the taxation of non residents of Spain considerably, but under the present draft, it seems, it will only be applicable to residents of other EU member states.

Under present legislation, non resident individuals and companies without a permanent establishment in Spain have to pay tax on gross income not on net income thus not being allowed any expenses with some exceptions. The changes contained in the draft legislation prepared by the Spanish Tax Authorities contemplate a restrictive deduction of expenses in the sense that the onus will be on the taxpayer to prove that the expense is directly related to the income generated. Unless the final legislation clarifies more what is to be understood by expenses directly associated or related with the generation of income, it may be too open for interpretation by the Tax Authorities and it could create arguments with taxpayers and their professional advisors.

In any event it is excellent news for the non residents in general and it should have a positive effect for the Spanish economy which will be considered more attractive for inward investment from individuals and companies resident in other EU member states.

For the non resident property owners it will have a very positive effect as they will be allowed to offset their directly related costs in order to calculate their tax liability for income tax in Spain.

All these recent changes, leaving capital gains tax at only 18%, no wealth tax and now this announced improvement to the taxation of income for non residents are steps in the right direction and they will make Spain even more competitive as a destination for investment and residential tourism for home owners from abroad who will see in Spain not only a modern European country with excellent infrastructure, outstanding healthcare facilities, marvellous weather and very hospitable and friendly people, but a more and more attractive tax system which is an important consideration when looking for investment opportunities.

Bernard Fay

Article published on Sur in English

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